Sharpe Ratio
Return per unit of risk. Measures whether you're getting paid enough for the danger you're taking.
The Sharpe ratio answers the question every investor should ask: am I being compensated for the risk Iām taking, or am I just getting lucky on a roller coaster? Two funds both returning 20% look identical until you look at volatility: the one that achieved it with steady growth has a far higher Sharpe than the one that swung wildly. Formula: (Portfolio Return ā Risk-Free Rate) / Portfolio Volatility. Benchmarks: below 0.5 is poor, 1.0ā2.0 is good, above 3.0 is exceptional (verify your data).
How It Works
Numerator = excess return above the risk-free rate (T-bills, ~4ā5% in 2026). Denominator = standard deviation of returns. Higher Sharpe = more return per unit of risk taken.
Example
During v16 sell model tuning, multiple strategy variants produced similar total returns. The Sharpe ratio differentiated them sharply: wide-stop variant scored 1.8 (smooth equity curve), tight-stop variant scored 0.6 (same total return, jagged path). The model selected the high-Sharpe variant. Detailed in Oil v16 Sell Model.